The US Federal Reserve’s benchmark interest rate was zero, while central banks in Europe and Asia even ran negative rates to stimulate economic growth after the financial crisis and through the pandemic.
And there’s a lot of debt out there: According to the Institute of International Finance, a record $307 trillion was outstanding in the first half of 2023.There are lots of reasons for the dramatic bond-market shift, but three stand out.Economies, especially the US, have proved more robust than anticipated.
The mortgage-cost squeeze is a story playing out everywhere. In the US, the 30-year fixed rate has surpassed 7.5%, compared with about 3% in 2021. That more-than-doubling in rates means that, for a $500,000 mortgage, monthly payments are roughly $1,400 extra.Higher rates mean countries have to shell out more to borrow. In some cases, a lot more. In the 11 months through August, the interest bill on US government debt totaled $808 billion, up about $130 billion from the previous year.
Ultimately, as governments try to be more fiscally responsible, or at least give that impression, the burden falls on households. They’re likely to face higher taxes than otherwise along with suffering financially strained public services.US Treasuries are considered one of the safest investments on the planet, and in the last decade or so the rewards for holding them were modest given suppressed yields.
Such strains could mean corporates have to scale back investment plans or even look for savings, which may translate to job losses. Such actions, if widespread, would have implications for consumer spending, housing and economic growth. In the absence of cheap debt to help boost returns, some firms, including giants like KKR & Co., have been writing bigger equity checks to get deals done, while others have been opting for minority stake purchases. At the same time, PE firms have found it harder to sell assets, leading to delays in returning money to investors and impacting their ability to raise new funds.
While a broader turmoil could emerge from anywhere, it’s worth noting that property crises have frequently been the germ for a wider banking crisis.Lately, both bonds and stocks have been going down. That’s not ideal for defined-benefit pension funds that tend to use the classic 60/40 strategy, of 60% equities and 40% bonds.
That’s because Fed Chair Jerome Powell and his counterparts around the world have been focused on trying to slow their economies to a sustainable speed in order to get sky-high inflation down. There’s a risk that the slowdown becomes too pronounced, but for now, central bankers seem set in their position.
)The Ozempic Effect Is Coming for Everything From Kidney to Heart Disease TreatmentsTrump Asked Melania To Don A Bikini For His Buddies, Insider Claims Rep. Jim Jordan received 200, 199, and 194 votes, respectively, during the speaker votes last week. In a secret ballot, his support cratered further."I hadn't even heard it.